IEA Numbers Paint Bleak Picture for European Refiners

Most oil refiners have enjoyed strong profit margins in the past couple of months but data released by the International Energy Agency Wednesday bluntly shows why many European companies have more of a struggle on their hands than their U.S., Asian and Middle-Eastern counterparts when the situation isn't so rosy.

In its monthly report, the Paris-based energy watchdog reintroduced its refinery margin calculations and also presented estimates of operating costs for refiners.

"Operating costs are highly dependent on a number of key parameters, including size and complexity of the refinery, utilization rates, local wage expectations for refinery workers, employment and environmental regulations," the agency said.

These costs, excluding depreciation, amortization and the cost of refinery fuel such as crude, stand at $4 a barrel for northwest Europe and Mediterranean, at $3.30 a barrel for U.S. Gulf Coast and U.S. Midcontinent refiners and at $3 for Singapore companies, the IEA said.

The $1-a-barrel difference between Europe and Singapore may look insignificant when profit margins are good. However, when margins weaken due to expensive crude oil, something many analysts expect to happen if tensions escalate in the Middle East, and lackluster consumer demand for fuel prevents price rises, this one-dollar difference could become a key to whether or not a company breaks even.

Profit margins are already tighter in Europe. According to the IEA, processing Brent crude oil into fuel in northwest Europe in August would have generated a profit margin of about $9 a barrel, compared with $35 a barrel for U.S. Midcontinent refiners, which have access to much-cheaper Nymex crude.

As such a sharp rise in crude oil prices, without higher fuel prices due to weak consumer demand, would likely place European refiners in the red sooner than their U.S. counterparts.

No surprise then that "European refinery closures completed or announced since the start of the economic downturn in 2008 now amount to 1.6 million barrels a day of aggregate capacity," or about 13% of the capacity online in the third quarter of 2012, the IEA said.

"Another 150,000 barrels a day will be shed in the fourth quarter with the shutdown of ERG's Rome refinery and as Exxon reduce capacity at its Fawley plant in the U.K. later this year," the watchdog added.